Property tax faces overhaul

Idaho property taxes: A primer

“ Driven by budgets. Idaho's property tax system is driven not by property values, but by local government budgets. Taxing districts, such as cities, counties, highway districts, fire districts and so forth, set their budgets within state-mandated limits. Then, they divide the total assessed property value in the district into the budget to come up with the tax rate. Idaho's average property tax rate, statewide, is 1.462 percent. Most tax levy rates for individual districts are limited by law.

“ When values rise. If property values go up, that doesn't necessarily mean a tax increase. If local government budgets stay the same, it would mean a decrease in rates to bring in the same amount of money from a higher tax base. But if values go up for one sector – such as residential property – and not for others, it means a tax shift. Owners of residential property would pay higher taxes, and owners of other types of property would pay less, to bring in the same amount of money. In fast-growing areas, budgets tend to increase, rather than staying the same, to provide services to the additional residents. Inflation also causes budgets to increase, as do new services demanded by residents.

“ It's 3 percent plus. By law, local governments can't increase their property tax-supported budgets by more than 3 percent a year. But that doesn't count voter-approved bonds or levies, or the additional taxes brought in by annexation or new construction. Those can be added to the 3 percent increase. Also, if districts increase taxes by less than the 3 percent each year, they can reserve the difference for possible imposition in the future if needed. This "foregone balance" of potential future taxes now totals $30 million statewide. In 2004, Idaho's total budgeted property taxes were $1.14 billion, an overall 5.5 percent increase from the previous year.

“ Schools are different. Property taxes for schools work differently. They apply a set tax rate, or multiplier, to the previous year's total property value in the district. If property values went up the previous year, schools get more money. If they went down, schools get less. Through an equalization formula, the state makes up some of the difference for poorer districts that collect less in taxes than more wealthy districts.

BOISE – Though Idaho is in the midst of a property tax revolt, property taxes in Idaho actually are lower than those in most states.

Idaho ranks 37th among the states in property taxes per capita – 26.4 percent below the national average. When property taxes are measured against personal income, Idaho comes out 31st, 10 percent below the U.S. average.

But that’s little solace to Idahoans in fast-growing, popular areas where taxes have taken big jumps.

“We’ve been discovered by the out-of-state wealthy,” said Rep. George Sayler, D-Coeur d’Alene. “Property values are skyrocketing. … My own lot doubled this year in assessment value. That’s happened to quite a few people who live anywhere near the water up here.”

Tom Johnson, of Hayden, has seen that firsthand. The retired schoolteacher built his house on little Avondale Lake in 1979 for $87,000 on land he bought for $42,000. Now, his home is assessed at nearly $500,000. A neighboring house is going on the market for $675,000. “We built this place to live in, my wife and I. We’re retired now,” Johnson said. “We don’t care what it’s worth – we want to live in it.”

But if taxes continue to soar, he said, they may be forced to sell. “What they do is they force you out of your house, and it’s unconscionable as far as I’m concerned.”

Jumps in property values – common when neighboring properties sell for much more – don’t necessarily mean tax increases, but they can. In the past decade and a half, residential property across the state has been surging in value, while commercial, industrial, timber, mining, utility and other types of property have barely increased at all. That’s meant a tax shift to the owners of residential property, who in 2004 paid a record 61.6 percent of Idaho’s property taxes.

The resulting outcry has spawned a movement to pass an initiative to cap both taxes and assessed values for all property and prompted the state Legislature this year to appoint an interim committee to hold hearings around the state and recommend changes to Idaho’s property tax laws. Sayler is on that panel, which is led by Sen. Shawn Keough, R-Sandpoint, and Rep. Dennis Lake, R-Blackfoot.

“This issue is so important to the people in my area,” Keough said. “I’m looking forward to the work. It is a huge task.”

The panel will hold its first meeting Wednesday in Boise in the state Capitol’s largest meeting room, and then plans to hold meetings in every region of the state.

Much-maligned tax

Public interest promises to be high. A property tax forum last week in Coeur d’Alene, sponsored by Kootenai County Democrats and featuring Sayler and Rep. Frank Henderson, R-Post Falls, drew a crowd of about 200 people to the Lake City Senior Center.

The property tax has long been the most-hated among state and local taxes in Idaho. Boise State University’s annual public policy survey has consistently found it the least popular, far outranking the sales tax and the state income tax.

Jim Weatherby, a BSU political scientist, said, “The property tax has always stood out – probably for the same reason that it’s been defended as a good tax as well, and that’s because of its visibility.”

Taxpayers get a bill each year for the full amount of their property taxes, even though they may pay their taxes with their monthly mortgage payment, and they know where to complain about it because it comes from the county.

Randy Nelson, head of Associated Taxpayers of Idaho, said, “Our income tax is withheld, we don’t even notice it, and that’s a big tax. Our sales tax we do a little at a time. The property tax, you get the bill right at Christmas time, and it’s once a year and you see it.”

Plus, the property tax is Idaho’s most stable tax. Sales tax can vary with the economy, and income tax goes up and down with employment and wages. Property tax is based on wealth as measured by property ownership – and that doesn’t vary as quickly. The combination of the three taxes gives Idaho what’s widely considered a well-balanced tax system – unlike Washington, which has no state income tax, and Oregon, which has no sales tax.

But that very stability makes the tax unpopular in economically troubled times. During the Great Depression, a statewide property tax was Idaho’s only major tax, and people who’d lost their jobs were having trouble paying. “When we started our income tax system in Idaho in 1931, we called it the ‘Property Tax Relief Act of 1931,’ ” Nelson said. “So we’ve been at this a long time.”

System changed over years

Idaho added the sales tax in 1965 and eliminated the property tax as a source of funding for state government. Now, all of Idaho’s property taxes fund local governments and local schools.

In the 1970s, Idaho saw its last major property tax revolt, leading to the passage of the One Percent Initiative in 1978. It was a time when courts had ordered county assessors to revalue residential properties to match actual market conditions, and homeowners, as they are now, were seeing soaring tax assessments.

But the initiative, which sought to cap both taxes and assessed values, didn’t mesh with Idaho’s tax system and conflicted with the state constitution’s requirement for uniformity – that like properties be taxed alike. So state lawmakers amended it first to freeze local government budgets, then to cap them.

“It was not and could not be enacted as envisioned,” Weatherby said. “It just didn’t fit Idaho.”

But the new budget caps did nothing to head off a shift of taxes to homeowners. In 1982, Idaho voters passed an initiative to create the “50-50” homeowner’s exemption. It exempted from taxation 50 percent of the value of an owner-occupied home, not counting the land, up to a maximum of $50,000. That was big, and shifted taxes significantly away from homeowners and onto business property.

“In 1982, the homeowner’s exemption was a radical proposal,” Weatherby said. But since then, it’s never been adjusted for inflation. “It’s clearly not (radical) today, though it is still a significant source of property tax relief for residential property owners,” he said.

Many lawmakers now would like to increase the homeowner’s exemption to address the tax shift homeowners have been picking up. By doing that, Sayler said, “we’re stopping the shift that’s taking place and restoring the balance a little. … I haven’t heard from anybody other than homeowners, actually.”

But the initiative that’s in the works, far from upping the homeowner’s exemption, instead does away with it.

Chuck Cline, a former Nez Perce County commissioner who’s leading the effort to put a lengthy, far-reaching initiative on the ballot capping property taxes, said his idea is to cap all property taxes at 1 percent of value, and to limit increases in value to 2 percent a year until a property sells, at which point the value would rise to the sale price. He would eliminate major exemptions including the 50-50 homeowner’s exemption, along with all taxes on personal property, which mainly is charged on industrial equipment.

“Why shouldn’t everybody just pay the same percentage?” Cline asked. “All property is treated exactly the same … no matter whether it’s a farm, whether it’s a business, or what it is.”

With Idaho’s current average property tax rate at 1.47 percent, he said, “the impact is still you’re going to be paying less tax.”

However, that may not be true for moderate or lower-end homes. The owner of a $125,000 home with a homeowner’s exemption and a $25,000 land value, if taxed at the statewide average rate, now pays annual property taxes of $1,103. Under Cline’s plan, that owner would pay $1,250. For an $80,000 owner-occupied home where the land value is $15,000, the tax under current law would be $698; under Cline’s proposal it would be $800.

“Property tax is a lot of moving parts,” said Bert Waisenan, an analyst with the National Conference of State Legislatures.

Many states are looking for ways to provide property tax relief, Waisenan said, with much of the concern coming from homeowners bitten by a soaring real estate market that’s pushing up values. “It’s certainly a current trend – there’s interest in it.”

Nevada has just enacted a two-year cap limiting homeowners’ value increases to 3 percent a year and other property to 8 percent a year and is debating broader reforms. Maine, where voters rejected a tax-cap initiative last year, is having the state pick up more education costs to ease property taxes – a move Idaho made in 1994 under then-Gov. Phil Batt, and which some lawmakers want to expand. New Hampshire is considering eliminating its state property tax and replacing it with a cigarette tax increase, Waisenan said.

Property tax specialist Henry Nagel, of the Idaho State Tax Commission, said many people misunderstand Idaho’s property tax system, thinking that if they can limit property values, taxes won’t go up. “Our system is not a value-driven system, it’s a budget-driven system,” he said. “What causes it to go up isn’t the fact that the value went up, it’s the fact that the budgets increased.” However, he noted, changes in value within the tax base can shift taxes from one taxpayer to another.

Exemptions also cause shifts, as everyone else in the district who doesn’t get the exemption pays a little more to make up the difference. State lawmakers have granted major property tax exemptions to big business and agriculture in recent years, which increased the pressure on residential property taxes.

Making money, spending money

Cline said local governments should “do a little more fiscal responsibility.” He had no specific suggestions on eliminating local government services so budgets can be cut, but said that public safety should be the first priority and nothing else should be funded unless there’s money left over.

Local government officials say they’re just doing their jobs.

“For county government, what we do are pretty much mandates – we run the courts, we run the jails, the law enforcement, the indigent program,” said Dan Chadwick, executive director of the Idaho Association of Counties. “So the Legislature is going to have to tell us to quit doing that stuff before we can just stop spending the money. … We don’t have the luxury of saying, ‘No, we’re not going to provide that service.’ “

Idaho’s property taxes, which totaled $1.148 billion in 2004, go mainly to fund schools, cities and counties. Including voter-approved bonds and levies, schools got 42.8 percent of the tax in 2004; counties, 23.1 percent; and cities, 21.6 percent. Highways and roads took up 5.3 percent; fire districts got about 3 percent; and other taxing districts took the remaining 4.2 percent.

Nelson said Idaho will need to look at whether some of those functions could be funded in other ways – such as by sales or income taxes, or fees or other sources. Since Idaho’s income and sales taxes also each raise roughly $1 billion, doing away with property tax entirely could mean doubling sales taxes to 12 percent or doubling Idaho’s already relatively high income tax.

Some lawmakers are looking at giving local government more opportunity to charge fees or local-option taxes to relieve property tax, and some are considering shifting more school funding to the state – possibly by increasing the sales tax, which drops from 6 percent to 5 percent on July 1.

Johnson, the retired schoolteacher, said, “They have to make some changes in the way it’s taxed. If the Legislature doesn’t do something, they’re going to get something brought down on them they probably won’t like.”

Keough said, “It’s time, I believe, that we look at our tax structure as a whole.”